Comcast (CMCST)—the largest U.S. cable provider—has been held in the Fund since 2002; over the years, we have actively added to and trimmed from the position based on relative valuation. In the first half of 2018, Comcast’s share price declined 17% amid concerns about its $31 billion cash offer to acquire UK-based pay-television company Sky PLC and its $65 billion all-cash bid for a majority of Twenty-First Century Fox’s assets.
Given these developments, our equity and fixed income teams worked together to evaluate Comcast’s risk/return profiles for a range of potential M&A outcomes. We spoke with company management about their overall M&A strategy and reconfirmed our longstanding view that they are skilled at allocating capital to create shareholder value. We believe the Sky acquisition is strategically sound because it would expand Comcast’s international presence and provide greater scale to amortize content costs. In July, Comcast dropped its bid for Fox and continued its pursuit of Sky.
In our opinion, the market has overly penalized Comcast’s share price as a result of concerns about bidding wars and subscriber growth. Trading at a multi -decade low valuation versus the S&P 500, Comcast was our largest addition in the Media industry during the first six months of 2018. The company has a de- facto local monopoly on broadband internet services in many parts of the United States and, despite talk of “cord cutting,” has the potential to grow through increased broadband penetration and pricing power in residential and business services. We believe NBC Universal (owned by Comcast) can increase its operating profit through affiliate fee increases at NBC and continued investment in its theme parks. In addition, owner- operator Brian Roberts has created significant shareholder value and leads a strong management team. Comcast, the Fund’s second-largest holding, was a 3.8% position on June 30.
From Dodge & Cox's Stock Fund second quarter 2018 shareholder letter.
